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A nervous calm continues to cast a
pall over the capital markets. The US dollar is narrowly mixed,
but within the ranges seen yesterday. Asian markets were
mixed, new that HSBC's flash Chinese manufacturing PMI rose to
51.7 in March from 50.4 in February failed to have much impact.
European bourses opened softly and, encouraged by disappointing
flash PMI figures, sold off further. Near midday in London, the
Dow Jones Stoxx 600 is off about 0.5, led by tech and basic
materials.

Peripheral European bond markets are firm. Italian bonds continue
to outperform Spain, with the latter perhaps hindered by
anticipation of today's supply. The 10-year spread has moved
almost 15 bp in Italy's favor over the past five sessions. Greek
bonds also are recovering for the second session after falling
for the previous seven. A general exception to the pattern comes
from emerging market stocks, where the MSCI benchmark has fallen
to new lows for the year.

There are seven developments between yesterday and today that are
shaping the investment climate.

1. The FOMC tweaked its macro-forecasts a bit
and recognized that the Q4 slowdown was temporary. It will
continue to purchases $85 bln a month in long term assets. The
pace of purchases may vary as the economic conditions change. We
think it will take the real Troika (Bernanke, Yellen and Dudley)
a few more months to feel confident that the improvement that the
Fed recognizes is not temporary, as it has proven in the recent
past. While the Fed is continuing to evaluate the effectiveness
of its purchases and discuss the exit strategy, the situation is
still fluid. It will take several more months at least for this
to be worked out. Bernanke did indicate a period between the end
of the asset purchases and the beginning of the remove of
accommodation is anticipated.

2. The UK budget projected GBP61 bln greater
borrowing through 2017-2018 than anticipated three months ago.
That means the peak in debt/GDP is not seen until 2015-2016 and
at over 100%. This may spur more speculation of a credit
downgrade by Fitch and S&P. There was a small adjustment to
the BOE's remit, which seemed to largely affirm the flexible
approach the MPC has shown regarding the fact that inflation has
been above target for 3 years and counting. A further change is
anticipated around shortly after Carney takes his post that will
involve the BOE's forward guidance.

3.Separately, the UK reported much stronger than expected
Feb retail sales and this lifted sterling back toward
yesterday's highs and weighed further on UK gilts. Retail sales
rose 2.1% in March, four times what the consensus expected. This
is the largest rise in nearly a year and is more likely to
reflect the rebound from the weather-induced weakness (-0.7%) in
January. Key resistance in sterling is seen in he $1.5200
area, a neckline of technical pattern that would project toward
$1.56.

4. The flash PMI readings for Germany and France were
disappointing. German manufacturing PMI slumped back
below 50 to 48.9 and the services reading fell back to 51.6 from
54.1. While Q1 GDP may still be positive, it is clear that with
headwinds from its neighbors, Germany is struggling. France saw a
small uptick in its manufacturing PMI, but at 43.9 (from 43.6),
it is hardly inspiring. And the flash service PMI was worse. It
fell to 41.9 from 42.7. This produces a composite that is the
lowest since March 20009.

5. The Cyprus crisis continues. It has become
clear in recent days that the creditors are demanding 5.8 bln
euros from Cyprus, but Cyprus officials continue to pursue
particularly onerous and odorous ways of raises those funds. The
new elected President had favored the tax on small depositors.
When this was rejected, Plan B is yet another way to throw its
people under the proverbial bus. It has reportedly floated the
idea of capturing the state pension assets and in exchange
providing government bonds backed by future revenue tied to the
gas discoveries and then raising the remainder (~1.6 bln euros)
with a tax on large deposits. The Troika will not be able to
sanction this as it does not stabilize the country's debt/GDP
ratio. Separately, the ECB which we understand had previously
threaten to deny Cyprus banks to any more ELA funds as of today
appears now to have given Cyprus the weekend to reach an
agreement.

6. Australia's PM Gillard withstood a leadership
challenge and is set to lead Labour into the Sept
election. However, the fissures in the party have not closed and
support for the party is flagging. Separately, New Zealand
reported a stronger than expected Q4 GDP (1.5% vs 0.9%
consensus)which gave the local currency boost. Although the RNBZ
has indicated no rate hike this year, many in the market continue
to see the risk of a year end move.

7. At pixel time, the market is still awaiting BOJ
Kuroda's first press conference. He is expected to
indicate willingness to buy more government bonds and with longer
maturities (5 year instead of 3 years currently). The
open-ended nature of the operation, which was to being next year
will likely begin sooner. Separately, Japan reported a
February trade deficit of JPY777.5 bln, which while a bit smaller
than expected is still the eighth consecutive monthly
deficit. The details were disappointing as exports fell
2.9% after rising in Jan for the first time in eight
months. Imports rose 11.9%, a little less than expected,
but well above the 7.3% pace seen in Jan. While we
recognize the data may be skewed by the lunar new year, we also
see how the price of imports is rising faster than the yen's
weakness is helping exports.